Tennessee Works Tax Cut
Tennessee Works Tax Act
Tennessee recently enacted the Senate Bill 275/House Bill 323, the Tennessee Works Tax Act, as the single largest tax cut in state history. The Tennessee Works Tax Act provides significant savings for Tennessee families and businesses through changes to state tax laws to increase Tennessee’s economic competitiveness. Changes include the phase in of single sales factor apportionment, conformity to federal bonus depreciation provisions in the Tax Cuts & Jobs Act (TCJA) of 2017, extension of franchise and excise credit carryforward periods, enactment of grocery tax holidays and paid family leave credit, small businesses tax relief, and sales and use tax sourcing provisions.
Single-Sales Factor (SFS) Apportionment
Tennessee aligns itself with more than 30 states by adopting the SSF apportionment for franchise and excise tax purposes, to be implemented over a three-year transition period. The SSF applies for purposes of determining net earnings for excise and net worth tax purposes under the franchise tax as follows:
- For tax years ending on or after December 31, 2023, but before December 31, 2024, the numerator of the apportionment formula is the property factor, plus the payroll factor, plus five times the receipts factor, over a denominator of seven.
- For tax years ending on or after December 31, 2024, but before December 31, 2025, the numerator of the apportionment formula is the property factor, plus the payroll factor, plus 11 times the receipts factor, over a denominator of 13.
- For tax years ending on or after December 31, 2025, a single receipts factor apportionment formula applies.
- Current law allows qualified manufacturers and financial asset management companies to elect single-sales factor apportionment. As part of this transition to single sales factor apportionment, the currently available apportionment elections for Tennessee manufacturers and financial asset management companies will be repealed for tax years ending on or after December 31, 2025.
A taxpayer can annually elect to use the triple-weighted receipts factor apportionment formula (i.e., property, payroll, three times receipts with a denominator of five) that applied to tax years ending before December 31, 2023. The election must result in a higher apportionment ratio for the tax year than the standard apportionment formula in effect for the tax year, and the taxpayer must have net earnings (not a net loss).
Conformity to Federal Depreciation Provisions of the TCJA
The Tennessee Works Tax Act conforms the excise tax to federal bonus depreciation in the TCJA, applicable to assets purchased on or after January 1, 2023. For these assets, net earnings or net loss is now computed under Section 168 as amended by the TCJA. Additionally, the Tennessee Works Tax removes the requirement to add back or subtract certain depreciation deducted in computing federal taxable income to assets purchased on or before December 31, 2022. This depreciation relates to excess depreciation taxpayers could have deducted had the taxpayer computed its depreciation under the previous Section 168 as it existed before the TCJA federal changes.
Extension of Tax Credit Carryforward Periods
The Tennessee Works Tax further extends the carry-forward period for several franchise and excise tax credits from 15 years to 25 years. The extended credit carry-forward periods apply to tax credits generated in tax years ending on or after December 31, 2008. The affected credits include:
- Industrial machinery credits
- Brownfield property credits
- Jobs tax credits
- Community investment credits
- Qualified production credits
- Paid family and medical leave credit
Grocery Sales Tax Holiday and Paid Family Leave Tax Credit
A new three-month sales tax holiday starts August 1, 2023, and ends October 31, 2023. During this period, food and food ingredients may be purchased tax free. Food and food ingredients are defined as liquid, concentrated, solid, frozen, dried or dehydrated substances that are sold to be ingested or chewed by humans and are consumed for their taste or nutritional value. Food ingredients do not include alcoholic beverages, tobacco, candy, dietary supplements and prepared food. Food and food ingredients purchased from a micro market or vending machine will remain subject to sales tax.
For tax years 2024 and 2025, Tennessee offers a new credit equal to the federal paid family and medical leave credit under Section 45S but limited to the compensation paid to Tennessee employees. The credit may be used to offset up to 50% of the franchise and excise tax liability, and any unused credit may be carried forward up to 25 years.
Small Business Tax Relief
The Tennessee Works Tax Act provides more than $150 million of annual tax relief to small businesses, including:
- Exempting the first $50,000 of net income from the excise tax
- 70,000 businesses qualify
- Exempting the first $500,000 in property investment from the franchise tax
- 68,000 businesses qualify
- Raising the exemption threshold for the business tax from $10,000 to $100,000 in gross receipts
- 140,000 businesses qualify
Going forward, small businesses making less than $100,000 a year will not have to pay the business tax, and small businesses will also see a reduction in their franchise and excise tax because of the exemptions.
Sales and Use Tax Sourcing Provisions
Sourcing of Receipts for Retails Sales
Effective July 1, 2024, sourcing of receipts for retail sales, including tangible property, digital goods and services will be based on the following hierarchy:
- When the product is received by the purchaser at a business location of the seller, the sale is sourced to that business location.
- When the product is not received by the purchaser at a business location of the seller, the sale is sourced to the location where receipt by the purchaser or the purchaser’s donee as designated by the purchaser occurs, including the location indicated by instructions for delivery to the purchaser or the purchaser’s donee, known to the seller.
- When subdivisions 1 and 2 do not apply, the sale is sourced to the location indicated by an address for the purchaser that is available from the business records of the seller that are maintained in the ordinary course of the seller’s business when use of that address does not constitute bad faith.
- When subdivisions 1-3 do not apply, the sale is sourced to the location indicated by an address for the purchaser obtained during the consummation of the sale, including the address of a purchaser’s payment instrument, if no other address is available, when use of that address does not constitute bad faith.
- When subdivisions 1-4 do not apply, or in which the seller is without sufficient information to determine which sourcing requirement applies, then the location is determined by the address from which tangible personal property was shipped, from which the digital good or the computer software delivered electronically was first available for transmission by the seller, or from which the service was provided.
Sourcing Receipts for Lease or Rental Properties
Effective July 1, 2024, sourcing of receipts for lease or rental of tangible personal property located in the state will be based on the following hierarchy for a lease or rental that:
- Does not require recurring periodic payments, the payment is sourced the same as a retail sale described above.
- Requires recurring periodic payments, generally the first periodic payment is sourced the same as a retail sale in accordance with the provisions for the sale of a product from out of state into this state. Periodic payments made after the first payment are sourced to the primary property location for each period covered by the payment.
- The primary property location is as indicated by an address for the property provided by the lessee that is available to the lessor from its records maintained in the ordinary course of business, when use of that address does not constitute bad faith.
- The property location must not be altered by intermittent use at different locations, such as use of business property that accompanies employees on business trips and services calls.
- Motor vehicles, trailers, semi-trailers or aircrafts that do not qualify as transportation equipment and watercraft with a displacement of less than 50 tons, that require recurring periodic payments, the first and each subsequent periodic payment is sourced to the primary property location. The primary property location is determined in accordance with scenario 2.
- Not-with-standing the primary property location covered by a recurring periodic payment, the lease or rental of transportation equipment is sourced the same as a retail sale in accordance with the provisions described above for the sale from out of this state into this state.
Sourcing of Receipts for Sales of Direct Mail
Effective July 1, 2024, sourcing of receipts for sales of direct mail in the state will be based on the following hierarchy:
- The sale of advertising and promotions, direct mail and other direct mail made from a place of business in this state to a purchaser, where delivery is made by the seller to a carrier or United States Postal Service location for distribution or delivery to direct mail recipients within the physical limits of this state, is sourced to the seller’s place of business.
- The portion of the sales price that equals the percentage of direct mail delivered to recipients in another state is not sourced to this state to the extent the seller knows, based on information provided by the purchaser, showing the jurisdictions to which the direct mail will be delivered.
- In lieu of providing the delivery information, a purchaser may provide the streamlined certificate of exemption to claim the direct mail exemption for the portion of the sales price that equals the percentage of direct mail delivered to recipients in another state.
- In the absence of bad faith, where the seller sourced the sale according to the delivery information provided by the purchaser in accordance with this section, the seller is not liable for tax if it is determined the purchaser provided incorrect delivery information.
Sourcing of Receipts for Sales of Prepaid Phones
Effective July 1, 2024, sourcing of receipts for sales of a prepaid calling service or a prepaid wireless calling service in the state will be based on the following hierarchy:
- The sale of a product made from a place of business within the state and delivered to a purchaser within the state, when sold from a place of business within the physical limits of this state; and
- The retail sale of a product from out of this state into this state, when sold from out of state into this state. In the case of a sale of prepaid wireless calling service, when a seller is without sufficient information to determine which sourcing requirement applies includes as an option the location associated with the mobile telephone number.
Direct Mail Exemption Repealed
Effective July 1, 2024, the sales and use tax exemptions for magazines and books that are sold to consumers through United States mail or common carrier for certain sellers and cooperative direct mail advertising are repealed.
How Cherry Bekaert Can Help
If you have any questions about how you can take advantage of these tax savings, reach out to your Cherry Bekaert tax advisor.